China Takes New Step Towards Opening Its Financial Markets to the World

SHANGHAI—China has pledged to launch a stock trading link between Shanghai and London by the end of this year, taking a fresh step towards opening up its financial markets and providing the U.K. with a vote of confidence ahead of Brexit.

The plan, announced by China’s central bank governor Yi Gang at a forum on Wednesday, is part of a suite of new measures aimed at further widening foreign investors’ access to China’s financial sector. It follows President Xi Jinping’s relatively soothing rhetoric on trade ties with the U.S. in a speech Tuesday.

The so-called Shanghai-London Stock Connect program will come after Beijing moved in recent years to allow global investors to trade on its two domestic stock markets, Shenzhen and Shanghai, via similar trading links with Hong Kong. Those trading links have enabled billions of dollars to flow between Hong Kong and mainland bourses each day.

However, the new program may not prove as popular as its predecessors—at least initially.

“Its impact is certainly more symbolic than material for now,” said Wu Zhaoyin, chief strategist at AVIC Trust Co.

The substantial time difference between London and Shanghai, currently seven hours, means investors in either location would have to trade very early in the morning or late into the night, Mr. Wu said. Moreover, the lack of knowledge of London-listed stocks among Chinese investors, especially the country’s nearly 90 million retail investors, could also hinder demand.

“Night shifts mean very small trading volume,” he said. “I can only think of HSBC off the top of my head, if you ask me about stocks in London.”

The planned Shanghai-London trading link will likely be a replica of the Shanghai-Hong Kong Stock Connect program, which Beijing unveiled in November 2014. The trading link allows qualified mainland investors to buy and sell shares in the Hong Kong market, a factor that has helped boost trading volumes there.

Such bilateral arrangements by Beijing to connect foreign markets with its own reflect both its gradualist reform approach and its persistent concerns about capital flight. The current trading links between mainland China and Hong Kong are structured in a way that means money flowing in either direction can only be used to buy stocks.

“Based on the current mechanism, every outbound deal is also settled onshore for Chinese investors. It’s a closed loop,” said Wendy Liu, Hong Kong-based head of China equity research at Nomura International.

Given China’s creaky financial system and high debt buildup, Beijing is keen to maintain a tight grip on the pace of financial liberalization and capital flows, analysts say.

“We can’t deal with it if we open the door too wide and too fast,” said Liu Weiming, founder of Beijing-based Fuxi Investment Management Ltd.